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Wednesday, September 7, 2011

Sallie Krawcheck’s Departure: The End Of The Experiment

This week, history repeated itself. Bank of America ditched its top wealth management executive in favor of a banKer whose assignment is to increase profitability by “encouraging” the 16,000 members of Merrill Lynch’s thundering herd to cross-sell bank products.

On Tuesday, Sallie Krawcheck was fired. I suffered the same fate not that long ago under very similar circumstances. After Bank of America took over Montgomery Securities and asked my management team to integrate our group into The Private Bank, I was fired and replaced by a banKer.

We wrote about this in our blog on September 25, 2008 – the most widely read and commented piece we’ve ever penned. What we said then is happening all over again – to the detriment of brokers and THEIR clients.

Wielding The Axe

Why are brokers and their managers inevitably sacrificed when banKers take over?

For two reasons. First, both Sallie and I weren’t willing to accept the bank’s demands to place a higher priority on cross-selling bank products. Brokers got into the business because they have a passion for helping clients manage their wealth, not selling checking accounts, home equity lines of credit, or toasters.

Second, we both refused to sell out our brokers on comp. We understood that the brokers’ compensation plan needed to be different than their “Bank of America teammates” who are paid salary plus bonus.

That an old-line NationsBank banKer since 1979 will head wealth management definitively signals the end of the grand experiment between Bank of America and Merrill Lynch.

For someone who has lived through this before, I’m astonished BofA is still drinking the same Kool-Aid. Namely, that BofA believes the bank – and not the individual broker – owns the customer relationship.The conceit is breathtaking.

What Happens Next?

First, YOUR clients will start to ask when you are leaving. Clients read the news, too. They understand what’s coming, allegedly in the name of additional benefits.

Second, the bank will begin to monitor brokers’ daily interaction with clients. They want to quickly find out who is with them and who is against. The oversight is designed to hopefully control when brokers leave.As one BofA banKer once told me: “We want to make sure brokers leave on our terms, not theirs.”

Third, some brokers will get fired. In fact, that's exactly what happened to us. Some of our top producing brokers got fired because they were looking for a new job. The term used by Bank of America’s legal department to describe their job-hunting was “skullduggery.” In essence, the bank tried to act preemptively to out the brokers who were looking, allowing the bank to gain a timing advantage when trying to retain “their” clients. Of course, everyone knows that clients are loyal to people, not companies.

The Bottom Line

The capitulation to the banKers isn’t surprising. BofA knows that selling bank products is ultimately more profitable than the brokerage business.The profit margin on brokerage is in the low teens. For banking products and services, it’s 30%+.If there is one thing banKers know, it’s math.

Because the banking business model is so much more profitable than the brokerage model, two things will happen: 1) The banKers will remain in control; 2) Brokers (and THEIR clients) will be on the short end of the equation. Read another way, brokers will face lower comp and their clients will be subject to statement stuffers promoting bank products. Each month. Not even the powers that be at BofA can suspend the laws of economics over time.

For clients at big banks, prepare for the onslaught – and forgive your broker if he or she is a little cranky. If you’re a broker, there’s no better time to learn what skullduggery means and to gain the timing advantage by breaking away on your terms.

10 comments:

Anonymous
said...

Deja vu indeed. I went thru the Montgomery/BofA merger with Jeff and remember their failed efforts all too well. The term I remember them bantering around most was the need to "increase our wallet share", their term for cross-selling. Amazing that the story never came out of the banker who did this successfully and got his very wealthy client to fund a bank deposit that paid him 5% or so... by pulling down his line of credit at 3%! Can you make that lost margin up on volume? Skulduggery indeed.

I too went through the Montgomery/BofA merger with Jeff & Co. It’s hard to cross-sell when you work for a company that has no regard for its clients AND employees (bankers and brokers). I have never worked for a company that treated people worse, and enriched senior management more, than BofA. Too Big to Fail? I hope NOT!

As a legacy Merrill person who worked with BofA before being let go, I fully concur with the spirit of the comments.. BofA hates individual identity and relationship building - the brokers as well as employees are treated as sheeple and as soon as anyone raises a different pov - thats it - they are cut loose before they make any noise. Culture at Merrill was very different. Many advisors may leave, but I feel BofA banks on the fact that enough will remain.. too big to fail ?

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About Jeff and Keith

Jeff has over 25 years experience in wealth management as a family advisor and a national manager of the wealth management businesses at Montgomery Securities, Bank of America Private Bank, and Presidio Financial Partners LLC.

Keith has over 25 years of experience in the financial services industry, including 10 years as the chief operating officer for several hedge funds. He was the COO and founding partner of East Avenue Capital Partners, Neuberger Berman Technology Management and Bowman Capital Management.

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